Budget day

One day up, the next day down. The US major indices closed Tuesday’s session in the red. The S&P500 gave back 0.81% following its biggest one-day jump a day earlier. Nasdaq fell 1.69%. Apple erased more than 2% as Tesla shed 4.45%. 

Last week’s sovereign bond rout dazzled investors’ eyes leaving them undecided on where to go next as the Covid vaccines and prospects of economic recovery combined to ultra-supportive monetary and fiscal policies remain tempting for taking more risk, but the warnings of bubble, tensions in the sovereign bond markets and rising real yields threaten the actual bullish setup.  

As such, a top Chinese regulator Guo Shuqinq’s words didn’t soothe investors’ nerves as he pointed at the necessity to reduce the high leverage within the financial system, and warned about the ballooned US and European equities. Although we can play the devil’s advocate and say that a financial bubble is formally not a bubble until it bursts, his words certainly hit a sensitive nerve. But in Asia! 

Asian stocks didn’t lend an ear to the latest bubble warnings. Most Asian indices traded in the green on Wednesday, including Chinese stocks. The Australian GDP grew 3.1% in the fourth quarter versus 2.5% expected by analysts. The Australia data was music to investors’ ears along with the increased pace of sovereign bond purchases from the Reserve Bank of Australia (RBA) which sent a clear message to the market last week: it won’t let the yields rise.  

Activity in European and US futures hint at a slow but positive start as well. 

If bubble warnings are just cheap talk, data is not. The US ADP report is expected to print a solid number near 200K in February. A soft figure should soothe investors in the idea that the Fed will have to remain supportive as long as needed to improve the US jobs market. But a strong figure should revive the idea that the Fed will consider tightening its policy earlier than otherwise, spur hawkish expectations and weigh on risk sentiment. 

The US dollar is softer before the ADP read.  

Gold finds buyers approaching the $1700 per oz threshold as the US 10-year yield stabilizes near the 1.40% mark. The absolute level of treasury yields shouldn’t be a turn-off for gold lovers. As long as we don’t see another rally in yields, gold could recover at least a part of past week’s losses. 

Elsewhere, US crude dipped below $60 per barrel a day before the OPEC+ meeting where the biggest suspense remains whether Saudi and Russia could find a further agreement on their production cut strategy. Russia is now willing to start winding the production cuts while Saudi thinks it's more cautious to keep the supply tight to give the necessary support to oil prices that have been under a decent downside pressure due to the pandemic. The last time we saw such disagreement between the two, the barrel of oil had hit -$40. This time the setup is completely different of course, but it’s a sure thing that in a world flooded by excessive oil supply, you are never too cautious restricting the output. It’s indeed better to be too cautious than being greedy and ruin collective efforts that have been made until now. If OPEC+ fails to send a clear message to the market that the supply cut agreement remains in place, we could see oil giving back its recent gains rapidly. So, the stress of not knowing what Russia will do is what’s weighing on oil prices before the OPEC+ meeting. It will be a make-or-break decision for short-term oil bulls. Either the door will be wide open for an additional expansion toward the $75-100 range pointed by some big bank research desks, or hopes will get shattered, and we will be back to the $50 pb range – where I believe the price is closer to where it should be based on the supply-demand picture.

And finally, it’s UK budget day in the UK . Sterling trades a touch below the $1.40 mark before we see Rishi Sunak appearing with his red box in hand. The strong US dollar hammered Cable’s advance above the 1.40 mark lately, but the medium-term outlook remains positive for the pound, as the Bank of England’s (BoE) passive behaviour faced with last week’s sovereign yield sell-off has clearly been another nail in the BoE doves’ coffin. 

Chancellor Rishi Sunak is expected to announce an extension in major fiscal support measures, such as the furlough scheme, the stamp duty holiday, and the VAT cuts. But the rising yields, which make the skyrocketing British debt significantly more expensive may encourage Rishi Sunak to sound slightly more hawkish than he would otherwise. Nevertheless, as his US peers, the Brits will certainly not worry too much about the rising national debt levels for now, as the primary goal remains saving the economy and saving people. Therefore, this week’s budget release will probably have little impact on sterling, if any, we could see a slight positive push given that an expansive fiscal policy may require a tighter monetary policy to avoid any overheating in the economy. Combined to the positive pressure in sovereign yields and the BoE’s passive take faced with higher yields, the Cable’s medium-term positive trend should remain intact, and we should see the GBP-bulls continue targeting the 1.50 mark in the coming months.